Branch Expansion And Technology Upgrades Will Attract More Customers

Key Takeaways

• Organizational initiatives and proactive management have reduced expenses and funding costs, potentially improving net margins and enhancing future earnings.
  
• Expansion of relationship-driven services and new digital solutions could drive revenue growth and attract more customers, supporting future earnings growth.
  
• Dependence on high-cost wholesale funding and inflation-related expenses may pressure net interest margins and operating expenses, risking earnings volatility.

Catalysts

Operates as the holding company of Umpqua Bank that provides banking, private banking, mortgage, and other financial services in the United States.

• Columbia Banking System has undertaken organizational initiatives in early 2024 that have reduced their normalized core expense base by 8% from the previous year, which could lead to improved net margins.
  
• The company is focusing on expanding its balance of relationship-driven loans and deposits, leading to an 8% increase in pre-provision net revenue and a 29% increase in net income, indicating potential for future earnings growth.
  
• Columbia Banking System plans to open 5 new branches in 2025 and is enhancing its offerings with a new business online banking platform, which could drive revenue growth by attracting and retaining more customers.
  
• Investments in technology including real-time payments and new digital solutions are expected to drive sustainable core fee income higher, supporting revenue growth.
  
• The bank is reducing wholesale funding costs and improving net interest margin through proactive management, which could enhance future earnings as interest rate changes continue to play out.

Columbia Banking System Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Columbia Banking System's revenue will grow by 14.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.1% today to 36.4% in 3 years time.
• Analysts expect earnings to reach $990.4 million (and earnings per share of $3.04) by about May 2028, up from $496.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $561.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, down from 9.8x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.36%, as per the Simply Wall St company report.

Columbia Banking System Future Earnings Per Share Growth

Risks

• The company anticipates a seasonal decline in customer deposits in Q1, which could lead to increased reliance on wholesale funding at higher costs, potentially negatively impacting the net interest margin.
  
• Columbia Banking System expects continued inflationary pressures, including a 7% increase in health insurance costs and annual merit salary increases, which may drive higher operating expenses and impact net margins.
  
• The company is projecting an increase in wholesale funding to offset the seasonal decrease in deposits, which could pressure net interest margins as these funds bear higher interest costs than customer deposits.
  
• A focus on reducing the balance of transactional real estate loans may lead to a contraction in this loan category, impacting overall loan growth and possibly affecting revenue if the relationship-driven loan growth does not sufficiently compensate.
  
• Changes in the bond market led to non-operating fair value losses, which impacted noninterest income in the fourth quarter, indicating potential earnings volatility related to market conditions.

Valuation

• The analysts have a consensus price target of $27.318 for Columbia Banking System based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $24.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $990.4 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 6.4%.
• Given the current share price of $23.25, the analyst price target of $27.32 is 14.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.